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The role and purpose of contract management

This week I have focused on the findings of the UK National Audit Office in its investigations on the state of contract and commercial management.

Few of its observations will come as a surprise to practitioners in this field. Indeed, it reflects many of their pent-up frustrations in the misalignment of contracting discipline with business value. The relegation of contract management to a subordinate and largely administrative / quasi-legal role has significant cost and revenue implications, as revealed by many IACCM research reports.

The NAO describes these issues in the following way:

Government fails to recognise the value of contract management. The purpose of contract management is to use commercial mechanisms to improve services and reduce costs. Too often contract management has been seen as delivering the deal that was agreed when the contract was signed. This has meant that contract management has been seen as a way to avoid things going wrong, rather than unlocking value.

Government needs to recognise that value is achieved over the life of the contract. This means designing policies it has the capability to deliver, planning for the contract management stage earlier, and paying it more attention.

Senior managers in central government departments have not taken contract management seriously. Central government has yet to adapt to the commissioning role it aspires to. Departments have not adapted governance to the expanding role of government contracting: they have lacked the basic infrastructure of oversight, senior engagement, challenge and scrutiny. Systems of governance have focused on approving new projects, as if government’s responsibility ends when the contract is signed.

Senior managers have not demanded visibility over their contracts. Senior managers have not always acted as if they recognised that departments are responsible and carry the risk for the services they have contracted. Managers have rarely demanded combined portfolio information to scrutinise and challenge operational contracts. Senior managers have often only engaged on contracting issues to firefight problems. As a result, they have put little pressure on teams to improve the information they rely on to manage the contract.”

The highlighting is mine. I challenge private sector organizations to demonstrate that these same weaknesses do not largely apply within their operations. The truth is that contract and commercial management are typically weak and often ignored as disciplines. As the National Audit Office points out, it is time to change.

A distinct and respected specialism

“The root cause of the weaknesses in contract management is failure over many years to establish contract management as a distinct and respected specialism with a strong ethos and well-defined responsibilities. Our accompanying report confirms this to be the position across government. Contract management roles have carried lower status and profile than posts on major policy development or projects, and in procurement teams. We consider this a dangerous position for outsourced services.”

This is another extract from the recent report by the UK National Audit Office on Government contracting. The comment could equally be made of most private sector companies.

Many may look at this statement and ask ‘so what?’ They would challenge the idea that ‘weaknesses in contract management’ are dangerous. ‘Show me the evidence’, they demand. And of course, historically they have been safe because the weaknesses ensure there is no data and the lack of data ensures the weaknesses continue.

But the world is waking up. Driven by the work undertaken by IACCM, there is growing realization that poor contract management carries a heavy economic cost. This may be due to lost revenues, lost savings or cost overruns – and cumulatively, it represents a lot of money. Austerity programs seem to be creating Government interest and awareness of this potential far faster than in most commercial sector organizations.

It is frustrating now that we have the data that action is not occurring faster. But it comes back to this issue of weakness and the consequent skills. Low status groups do not attract powerful or strategic leaders. Therefore we lack any bottom-up drive for executive awareness. Many of today’s contract management groups are embedded in other functions that have little interest in raising the profile of this activity or of the people who perform it. They lack the motivation, the budget or the remit.

So progress is slow, but it is happening. And reports like this from the NAO will certainly accelerate that interest.

For me, the big point is contained elsewhere in the NAO report and that is distinguishing contract management as a practice and function from contract management as a capability or competence. Many people are involved in performing a contract management role; relatively few need to be practitioners. My interest – and indeed the interest of IACCM – is in assisting organizations to define and implement that overall capability and competence. This is about far more than simply training a few people to be contract managers; it is about creating a leadership team accountable for ensuring the economic results that good contracting can deliver.

Are you addressing problems with contract management?

Last week, the UK’s National Audit Office provided Parliament with its latest reports on Contract Management. They are encouraging, in that they reflect the robust focus that government is placing on this discipline. At the same time, they reveal the depth of the challenge in driving improvement.

Such is the depth of these reports that I will cover them in several blogs this week; we will also shortly be interviewing the author of the reports on a webinar. It is interesting that a number of Governments are now committing significant resources to improving their contracting capabilities. IACCM is working closely with them. Indeed, it seems to me that the public sector is actually starting to out-strip most private sector companies in its grasp of the importance of contract management in today’s business environment. I often have to smile when I hear from our public sector members about the assurances they have had from senior private sector executives about their commercial skills and processes.

IACCM’s Capability Maturity Assessments are increasingly used by the private sector to review their contracting processes – and for many, the issues highlighted by the NAO ring true. Therefore I am going to start these reports with the listing of weaknesses that the audit office uncovered when it tested 73 contracts from UK ministries.

Problems with contract management

The reviews found widespread problems with how government manages its service contracts. As well as testing for overbilling, 73 contracts were tested against the 8 areas of the NAO’s 2008 good practice framework for contract management. Issues were found on all 8 areas, for example:

Planning and governance (issues on 38 out of 73 contracts tested)

Departments lack visibility of contract management at board level and lacked senior-level involvement.

People (40 issues)

Government does not have the right people in the right place for contract management. There were gaps between the numbers and capability of staff allocated to contract management and the level actually required.

Administration (39 issues)

Contract management is not operating as a multi-disciplinary function. There was often limited interaction between finance, commercial and operational contract management functions.

Payment and incentives (48 issues)

Government is not fully using commercial incentives to improve public services. Levels of payment deductions allowed by contracts are often insufficient to incentivise performance. Open-book clauses were rarely used.

Managing performance (50 issues)

Contractual performance indicators are often weak and government is too reliant on data supplied by contractors.

Risk (47 issues)

Government does not have sufficient understanding of the level of risk it is retaining on contracted-out services. None of those in the cross-government review shared risk registers with the contractors to ensure all understood who was managing what.

Contract development (50 issues)

Departments are paying insufficient attention to the impact of contract change. For example, departments made changes at operational level in isolation from other service areas. Systems for maintaining up-to-date versions of contracts remain weak.

Managing relationships (31 issues)

Not all departments have had a strategic approach to managing supplier relationships. Senior management engagement with suppliers has not been widespread across government. A lack of meaningful incentives for innovation  can inhibit shared approaches to problem solving and mutual improvement.

Do these same issues impact you?

I wonder how many of us can say that similar weaknesses do not apply in our organization, or in our suppliers or customers? At least Government is awakening to the issues – and the very real financial consequences that come from failure to address them. In the private sector, while some have made real investments in developing their contract and commercial capabilities, I fear that many executives have not even awoken to the need.

The end of sales as we know it

On Successful Workplace, Chad Garrett writes about ‘the death of the enterprise salesman’. He describes the growing sophistication of customers, who undertake far more independent research and no longer rely on the sales interface for information or requirement development.

On this blog, I write extensively about change and in particular how it is impacting the way trading relationships are formed and managed. I agree with Chad’s observations – in fact, I would go further. The pressure from regulators is forcing a new era of honesty and transparency, driving the need for far greater integrity and openness throughout the sales process.

As with all periods of transition, there are teething problems. First, while customers are trying to improve the skills of their teams in researching the market, it is clear that areas such as requirement definition and documenting specifications / scope are still problematic. The frequency of a mismatch between a customer’s perceived needs and a supplier’s capabilities seems to be increasing. Also, this new environment means that many contracts are based on ‘customized ‘wants’ rather than ‘market needs'; that undercuts supplier economies of scale and increases the risk of failure.

As the blog points out, this evolution alters the skill set needed for both promotion to and interaction with the market. The role of holistic opportunity assessment and alignment with capability becomes even more critical and the cycle time for doing it is shorter. Meantime, squeezed by current role and measurement system, sales staff become more desperate to win and the likelihood of poor assessment or over-commitment increases …

Overall, this is just one more perspective that adds to the pressing need for improved commercial judgment and the importance of more disciplined ‘commercial assurance’. Inserting this capability at a much earlier phase of opportunity management will be critical to future success.

I  don’t know whether future marketing staff will have enhanced commercial and contract skills, or commercial and contract staff will have enhanced sales and marketing skills. But I am sure that greater integration of these competencies will be a feature of the rapidly changing market.

Why is Contract Management software struggling?

For years the analysts predicted meteoric growth – and it didn’t happen. Now, the complaint I hear is that the analysts largely ignore contract management software and see it as a sub-set of ERP.

So what went wrong? Why did contract management software fail to meet expectations – and is it doomed to be the success that never was?

Let me start by saying that I believe there is still massive market opportunity, but realizing it will require a significant shift of approach.

Software developers started in this space with the myth that contract management is a largely administrative discipline. This led to a focus on basic functions such as document management, repositories and monitoring milestones and events. The software automated existing processes, rather than challenging businesses to think differently about the issues associated with contracting. The early analysts added to the problem because they focused on high volume procurement contracts, largely in sectors such as retail, and saw the potential return on investment coming primarily from increased efficiency.

This meant that the industry failed to recognize the spectrum of relationships typical to most companies and actually ignored the higher value, more complex agreements that represent strategic significance. Hence, most implementations resulted in high levels of software customization accompanied by expensive consulting services. The resulting software was rarely capable of dealing with an organization’s overall contract portfolio and was not user-friendly, resulting in low adoption levels. Many large corporations implemented multiple packages, none of which gained enterprise status.

Providers and analysts saw contract management software as a tool to manage transactions, missing the point that businesses actually establish relationships and operate with a portfolio of contracts. This meant that they overlooked the big opportunity and the core return on investment – the issue of contract effectiveness and usability.

Struggling to establish a market, the industry has been driven by customer wants, rather than helping to shape their understanding of needs. Even now, most projections of return on investment make contract management software at best marginal and in many cases irrelevant.

To succeed, focus must change (and some providers have already started to grasp this). Here are five key areas that can revive opportunity:

  • Contracts are related to relationships. Software must facilitate the various relationships through which a business operates.
  • Many contracts are interdependent; that is, the performance of when depends on the performance of others (supply networks, teaming arrangements, sub-contractors etc.). Software must create and oversee these connections.
  • The software must be designed to facilitate business users, supporting their ability to make effective decisions and to oversee contract performance.
  • Rather than operate as an adjunct to ERP, it must focus on overcoming the problems created by ERP. Contracts are about interoperability between organizations, not internal efficiencies.
  • Contracts and their performance are one of the great untapped bastions of data. The potential for generating critical management information is only now starting to be grasped – and it can be revolutionary in terms of value, quality and competitive advantage.

These factors cause me to have continued optimism that contract management software will succeed. But which suppliers are the best bet? Well, that is a different question – and a topic for another day!

Ethics or cash cow?

There are those who would argue that the scale of fines being imposed by US courts and regulators on major corporations reflect high principles and a determination to raise ethical standards. Others take the view that this is a cynical way to raise cash and that it damages longer-term US economic interests.

The United States is certainly unique in the degree to which it claims ‘extra-territorial’ rights. In both the extent and the scale of the penalties it imposes on foreign businesses and their top management, it presents itself as an imperial power, policing the world stage. While many other nations may applaud and adopt the ethical principles which these reflect, none comes anywhere close to the scale of the financial levies imposed by the US judicial system, nor do they act so freely in extraditing and imprisoning foreign citizens (indeed, it is impossible to imagine the US ever operating to such arbitrary rights with regard to its own people).

Recent judgments such as those against France’s BNP or the UK’s BP have generated increasing concern in European capitals and warnings to the US authorities that their legal system is seen as lacking balance. Certainly these high profile cases add to the perception that the US operates with a high level of unpredictability and that operating and investing in is markets is therefore risky. Ironically, it is the sort of reputation that causes hesitation about investment in markets such as China, India or Russia – that is, doubts over the extent of the ‘rule of law’.

Part of the problem is the extent of localism in the US – there really Is not a national legal system until you reach the Supreme Court. Another is the entire culture of litigation and excessive numbers of lawyers chasing fees, regardless of the merit of their cases. A system controlled by lawyers, who are then major beneficiaries of that system, always runs the risk of lacking balance. Certainly the BP case appears to lack equity and is enriching people who are undeserving.

But on the counter-side, this same system has also imposed major penalties on US corporations and this tends to undermine arguments of institutional prejudice against foreign firms. On balance, I believe that the intentions behind the system are honorable and are driven by a genuine desire to raise ethical standards.

The challenge is this issue of balance and how external behaviors are influenced. I think the US does try to operate as a force for good in the world, but in order to gain credit for this position it must be seen to operate fairly and with reasoned judgments. The decisions of its courts do not consistently meet these standards; they need to be better controlled and there needs to be a central authority that can step in far faster when review is required.

The cost of focused negotiation

Max Bazerman is a behavioral economist and he has recently written a book, The Power of Noticing: What the Best Leaders See. He draws from his personal experience in failing to notice things, which he attributes to his tendency to focus.

In the book, Professor Bazerman offers many illustrations from the world of business, including examples related to negotiation and contract terms. For instance, he highlights a case study involving Walmart, which one of my colleagues has summarized thus:

In their contracts with Walmart, suppliers must agree to accept any financial or criminal liability resulting from the sale of their products. …Perhaps because it is protected from liability, and its value proposition is so firmly focused on low prices, Walmart historically had limited incentive to act on issues related to quality.

It is stated that, back in 2006, a company called Blitz presented a revised gas can design to Walmart that would prevent explosions and burn injuries by installing an “arrestor,” a device that would prevent a flame from flowing into the can, at a cost of between 80 cents and $1 per can. According to testimony, Walmart rejected Blitz’s design on the basis of the price increase, and Blitz halted its redesign project because it would be difficult to launch a national product that Walmart refused to purchase.”

 The root of the problem seems to be that a narrow focus on price and risk allocation stood in the way of broader business or ethical judgment. And before we are too critical of Walmart in this regard, we must ask how many negotiations (and business decisions) are similarly driven by narrow value criteria and measurements that cause the negotiators either not to notice or to ignore the bigger picture.

The key to good commercial decisions and effective contracting is to ensure breadth of perspective. As Professor Bazerman points out, this is challenging, but essential to achieve.



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